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JULY 16, 2015 www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
BG VIEW
ANTHONY WILSON
One of the lessons that local
investors can learn from a
recent initial public offering
(IPO) is that offerings that
are not appropriately priced
or brought to market for the wrong reason
or at the wrong time are liable to fail.
It is a message that those who are shep-
herding the Phoenix Park IPO would do well
to keep in mind---although the president of
the National Gas Company, Indar Maharaj,
did go out of his way in an interview in May
to say that the offer price would be less than
envisaged last year.
On the issue of IPOs, late last month, Dig-
icel Group Ltd announced plans to sell shares
in an IPO and list those shares on the New
York Stock Exchange.
Digicel, of course, is the Irish-owned
mobile-telephone company operating in 31
markets throughout the Caribbean, Central
America and in the South Pacific with an
estimated 13.6 million mobile subscribers.
The documentation for the Digicel IPO
indicates that the company hopes to raise
a maximum of US$200 million but there is,
as yet, no indication of the price of the shares
or the number of shares being offered.
Digicel plans to raise the US$200 million
in equity by selling Class A common shares,
which carry 10 per cent of the voting power
of its B stock.
According to the filing, Digicel's principal
owner, Denis O'Brien, will maintain control
on any action requiring general shareholder
approval as long as he owns B shares rep-
resenting at least 10 per cent of the common
stock.
In terms of its financials, Digicel reported
revenue of $2.79 billion and a loss of US$157.6
million, for the year ended March 31, 2015,
compared with revenue of US$2.75 billion
and a profit of US$43.5 million, for the year
ended March 31, 2014.
Not only did Digicel's operations in its
most recent financial year end in a loss, but
the company generated less cash in the year
to March 31, 2015, than in the previous year.
The company's operating free cash flow
was US$548.5 million for the period from
April 1, 2014, to March 31, 2015, and US$737.7
million for the previous year, according to
the filings. This means that its operating
free cash flow as a percentage of revenues
was 19.6 per cent for 2015, a sharp reduction
from the 26.8 per cent for 2014.
The registration filings reveal that Digicel's
debt totalled US$6.5 billion at the end of
March and the company is highly leveraged
and is susceptible to increases in the interest
rates of its outstanding bonds.
On the issue of the company's debt,
Bloomberg quoted Tammy Lloyd, a fixed-
income analyst with London-based Investec
Asset Management in London as saying:
"Given that leverage is high, it will be helpful
to be able to have equity as an alternative
source of funding to debt.
"It's positive and it's going to be interesting
to see what it means for the longer-term
strategy." Investec holds Digicel bonds.
The company has borrowed heavily and
used internally-generated funds to finance
US$1.5 billion in capital investment in order
to diversify its revenue stream away from
the sale of mobile phones and airtime.
In the registration documents the company
said: "Digicel is in the process of evolving
from a pure mobile telecommunications
company into a leading total communications
and entertainment provider, while remaining
focused on improving its competitive position
in each of its markets by providing customers
with access to better mobile technology,
more innovative products, a superior cus-
tomer experience and better value compared
to Digicel's competitors.
"This evolution includes the expansion of
its product offerings through developing its
Business Solutions services and entering
cable TV and broadband businesses, which
have lower penetration rates than the mobile
business in Digicel's markets."
Digicel also said it "believes there are sig-
nificant synergies from offering a combina-
tion of mobile, business solution, cable TV
and broadband and other related products
and services," related to brand, people, net-
works and distribution capabilities.
The document discloses that the company
has expanded its service offering to provide
cable television and broadband in nine mar-
kets and is in the process of rolling out fibre-
to-the-home (FTTH) networks in Jamaica,
Trinidad and Tobago and Barbados.
Is it not odd that Digicel objected so vig-
orously to the Cable & Wireless Commu-
nications acquisition of Columbus for US$3
billion, while it is busy recreating the com-
pany to offer the same services as the merged
entity?
Risks and competition
Interestingly, Digicel describes CWC as
"currently Digicel's principal competitor in
many of its markets."
Noting that the approval of the
CWC/Columbus transaction was subject to a
number of regulatory conditions on CWC, the
company said: "Digicel will monitor the adher-
ence process closely, as Digicel believes that
the acquisition potentially has anti-competitive
implications including (but not limited to)
anti-competitive effects in the sub-sea fibre
access market in the Caribbean region, monop-
oly control of cable TV, fixed-line and cable
broadband services in certain markets and
potential for abuses of dominant positions in
certain relevant markets on the part of CWC."
In the section of the filing relating to risks
facing the company, Digicel said it "faces sig-
nificant competition in each of the markets
in which it operates and competitive pressures
could have a material adverse impact on Dig-
icel's business."
According to Digicel, it faces competition
from established and new competitors in each
of the geographic markets and businesses in
which it operates and the nature and level of
the competition it faces varies for each of the
products and services it offers.
Digicel's competitors include, but are not
limited to, mobile, fixed-line, cable TV and
broadband, subsea fibre and terrestrial fibre
providers and information and communication
technologies service providers.
The company said: "In some of Digicel's
markets, its competitors may have more
advanced technology than Digicel, greater cov-
erage area than Digicel, or both. Moreover,
some of Digicel's competitors have more exten-
sive engineering, marketing, personnel and
capital resources than Digicel does.
"The level of competition is influenced by
the continuous and swift technological
advances that characterize the industry, the
regulatory developments that affect compe-
tition and alliances between market partici-
pants.
"For example, although number portability
is not currently implemented in many of the
markets in which Digicel operates, Digicel
expects that this will be implemented in several
of these markets over the coming years.
"The mobile telecommunications operators
in each market compete for customers prin-
cipally on the basis of services offered, price,
marketing skills, quality and reliability of service
and coverage area.
"Increased competition may result in pricing
pressure, reduced margins and profitability,
increased customer churn and the loss of rev-
enue and market share. Price competition is
especially significant on voice and short mes-
saging services, which are largely commodi-
tized, as the ability to differentiate these services
among operators is limited."
Importantly, Digicel revealed that for the
year ending March 31, 2015, about 60 per cent
of its total revenue (US$1.67 billion) was gen-
erated from mobile voice and, while its revenue
from data/Value Added Services was increas-
ing, "there is uncertainty as to whether the
future growth in such services will be sufficient
to replace any declines in mobile voice services."
Will Digicel IPO succeed?
Digicel chairman Denis O'Brien.